March 2009
(a) Ss.(2) and (3) of S. 14A are procedural in nature and, hence, retrospective. (b) All direct and indirect expenses are disallowable u/s.14A, which have relation with income not chargeable to tax. (c) S. 14A applicable to dividend earned by assessee
By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Chartered Accountants
fiogf49gjkf0d
New Page 1
38 (2008) 26 SOT 603 (Mum.) (SB)
ITO v. Daga Capital Management (P.) Ltd.
ITA Nos. 8057 (Mum.) of 2003 and 183, 1372 and 2048 (Mum.)
of 2005
A.Ys. : 2001-02 and 2002-03. Dated : 20-10-2008
S. 14A of the Income-tax Act, 1961 :
(a) Expenses falling under any head or Section which
are otherwise deductible as business expenditure or under other respective
heads, would call for disallowance to the extent to which those expenses
have been incurred in relation to income exempt from tax.
(b) Ss.(2) and (3) of S. 14A are procedural in nature
and, hence, retrospective.
(c) For purpose of S. 14A what is relevant is to work
out expenditure in relation to exempt income and not to examine whether
expenditure incurred by assessee has resulted into exempt income or taxable
income.
(d) All direct and indirect expenses are disallowable
u/s.14A, which have any relation with income not chargeable to tax under the
Act.
(e) S. 14A would be applicable where shares are held
as stock-in-trade.
(f) Provisions of S. 14A would be applicable with
respect to dividend income earned by assessee engaged in business of dealing
in shares and securities on shares held as stock-in-trade when earning of
such dividend income was incidental to trading in shares.
The assessee-company was engaged in the business of dealing
in shares. For the relevant assessment year, the assessee had exempt dividend
income and, therefore, the Assessing Officer disallowed certain expenses in
terms of S. 14A. The CIT(A) upheld the disallowance.
The Special Bench also held in favour of the Revenue on all
the matters. The Special Bench observed as under :
1. S. 14A has an overriding effect over all other
Sections allowing deductions :
(a) The residence of this Section in the first
sub-chapter, viz., ‘Heads of income’, clearly demonstrates that it
has been made applicable to all the heads of income. If the intention of the
Legislature had been to restrict its application to the expenditure under
heads other than ‘business income’, then it would have been placed under the
relevant sub-chapter instead of the first sub-chapter, which, in turn,
refers to all the heads of income. Therefore, the expenses deductible under
the head ‘Business income’ are not immune from S. 14A.
(b) S. 14A is a special provision which deals with
disallowances of expenditure incurred by the assessee in relation to income
which does not form part of the total income under the Act. The expenses
falling under any head or Section which are otherwise deductible as business
expenditure or under other respective heads, would call for disallowance, in
view of the specific provision of S. 14A, to the extent to which those have
been incurred in relation to the income exempt from tax.
2. Ss.(2) and (3) of S. 14A are retrospective :
(a) In case of substantive provisions, the general rule
is that a provision is normally prospective in nature, unless it is given
retrospective operation expressly or can be so inferred by necessary
implication.
(b) However, in respect of
clarificatory/explanatory/procedural provisions, the date of insertion loses
its significance.
(c) S. 14A was inserted with a view to clarify the
intention of making disallowance in respect of ‘expenditure incurred by the
assessee in relation to income which does not form part of the total income
under this Act’. This Section declared the intention of the Act ‘since
inception’.
(d) When Ss.(1) itself is clarificatory and then
resultantly retrospective, it is beyond comprehension as to how Ss.(2) and
(3), providing the mechanism to do what is provided for in Ss.(1), can be
construed as substantive and, hence, prospective.
(e) A proviso has also been inserted in S. 14A for
reducing its rigor, which stipulates that no reassessment u/s.147 or
rectification u/s.154 shall be carried out by the Assessing Officer so as to
give effect to the newly inserted provision. That has been done so as not to
disturb the proceedings which have already attained finality in the period
prior to this insertion. However, assessments which are pending at any
stage, either before the Assessing Officer or the CIT(A) or the Tribunal or
the Higher Courts, would be governed by the mandate of that Section as it is
retroactive. From the above discussion, it is clear that Ss.(2) and (3) are
procedural in nature and, hence, retrospective.
3. Expenditure in relation to exempt income :
(a) The language of Ss.(1) of S. 14A clearly provides
that no deduction shall be allowed ‘in respect of expenditure incurred by
the assessee in relation to income which does not form part of the tot
